Barry Eichengreen Criticizes Stablecoins: “Unstable and Expensive to Scale”

Barry Eichengreen’s Perspective on Stablecoins

Economic historian and UC Berkeley professor Barry Eichengreen delivered a sobering critique of stablecoins during the Unitize conference on July 10. Eichengreen argued that stablecoins, despite their popularity in the cryptocurrency world, face significant economic and scalability challenges that hinder their potential to disrupt the financial system.

In particular, he dismissed Facebook’s proposed Libra stablecoin, calling it a project plagued by “insoluble” issues:
“Libra is an interesting idea that will never see the light of day.”

The Challenges Facing Stablecoins

1. Fragility of Partially Backed Stablecoins

Eichengreen explained that stablecoins backed only partially by fiat reserves are highly vulnerable to speculative attacks, similar to historical collapses of pegged exchange rates:
“Stablecoins are either fragile — prone to attack and collapse if partially collateralized with actual dollars or dollar bank balances…”

This fragility raises questions about the long-term viability of stablecoins that lack comprehensive backing mechanisms.

2. High Costs of Full Collateralization

For stablecoins that aim to be fully or over-collateralized, Eichengreen pointed out the prohibitive costs associated with scaling:
“They are prohibitively expensive to scale up if fully or over-collateralized.”

Libra: An Ambitious but Flawed Project

Facebook’s Libra, now rebranded as Diem, was singled out by Eichengreen as an example of a stablecoin facing unsolvable problems. Despite multiple revisions, including a new whitepaper, Eichengreen believes Libra remains fundamentally flawed.

Concerns About Monetary Policy

Eichengreen highlighted that Libra could undermine the effectiveness of national monetary policies, especially in emerging markets. Central banks in these countries might struggle to maintain economic stability if Libra achieves widespread adoption.

Excessive Collateralization and Fees

The proposed over-collateralization of Libra tokens further complicates its viability. Eichengreen argued that funding this excess backing through transaction fees would deter user adoption.
“Fees are going to be kept low, rais[ing] questions about the adequacy of the capital buffer,” he added.

A Misunderstanding of Financial Economics

Eichengreen also criticized the broader stablecoin sector for its lack of understanding of financial economics and history. Drawing from his own experiences, he recounted meetings with stablecoin founders and investors:
“My luncheon companions knew all about blockchain, but they didn’t know much about monetary economics.”

This disconnect, he suggested, has led to unrealistic expectations about stablecoin scalability and stability.

National Governments and Libra

One of the biggest hurdles for Libra, according to Eichengreen, is the likely resistance from national governments.
“National governments are going to be queasy about the creation of a private, Facebook-owned and operated central bank,” he remarked.

Governments may view Libra as a threat to their sovereignty over monetary policy, creating regulatory roadblocks that could stall or even prevent the project’s launch.

The Future of Stablecoins

While some analysts argue that stablecoins have the potential to revolutionize the financial system, Eichengreen remains skeptical. He believes that fundamental economic and regulatory challenges will continue to impede their widespread adoption.

Unresolved Questions for Libra

Eichengreen concluded his critique with a grim outlook for Facebook’s stablecoin initiative:
“There are some very big uncertainties… My conclusion remains that some of those problems are insoluble.”

Conclusion

Barry Eichengreen’s analysis highlights the complex challenges facing stablecoins, from economic vulnerabilities to regulatory resistance. His critique of Facebook’s Libra underscores the hurdles these digital assets must overcome to achieve mainstream adoption.

As the stablecoin ecosystem evolves, addressing issues of scalability, collateralization, and government oversight will be crucial for their success in reshaping the financial landscape.

To explore more insights on stablecoins and blockchain innovations, check out our detailed articles on cryptocurrency and digital finance trends.